What do we mean by 'economies of scale'?

Economies of scale refer to the cost advantages that a business can achieve as it increases its level of production. This concept implies that as the scale of operation grows, the average costs per unit can decrease. This is often due to the spread of fixed costs over a larger number of goods produced, better negotiating power for bulk purchasing of materials, and increased operational efficiencies.

When a company produces more, it typically benefits from reduced costs in various areas, such as production processes, labor, and materials. Thus, as output rises, the average cost per unit falls, allowing businesses to become more competitive in pricing and potentially increasing their profit margins.

On the other hand, increased revenue due to better marketing does not directly relate to the concept of economies of scale, as it focuses more on sales growth rather than cost efficiency. Increased employee training expenses do not align with economies of scale, which emphasize cost reductions rather than increases in expenses. Similarly, higher material costs due to bulk purchasing conflicts with the principle of economies of scale, where bulk purchasing generally leads to lower material costs instead.